MISSION PRODUCE, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited financial statements and related notes included elsewhere in this quarterly report. This discussion and analysis contains forward-looking statements based upon our current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. Please refer to the section of this report under the heading "Forward Looking Statements."
Overview
We are a world leader in sourcing, producing and distributing fresh avocados, serving retail, wholesale and foodservice customers. We source, produce, pack and distribute avocados and a small amount of other fruits to our customers and provide value-added services including ripening, bagging, custom packaging and logistical management. In addition, we provide our customers with merchandising and promotional support, insights on market trends and training designed to increase their retail avocado sales.
We have three operating segments which are also reportable segments:
•Marketing and Distribution. Our Marketing and Distribution reportable segment sources fruit from growers and then distributes the fruit through our global distribution network. •International Farming. International Farming owns and operates orchards from which substantially all fruit produced is sold to our Marketing and Distribution segment. Its farming activities range from cultivating early-stage plantings to harvesting from mature trees, and it also earns service revenues for packing and processing for our Blueberries segment, as well as for third-party producers of other crops during the avocado off-harvest season. Operations are principally located inPeru , with smaller operations emerging in other areas ofLatin America .
•Blueberries. The Blueberries segment represents the results of Moruga,
subsequent to its consolidation on
Results of Operations
The operating results of our businesses are significantly impacted by the price and volume of fruit we farm, source and distribute. In addition, our results have been, and will continue to be, affected by quarterly and annual fluctuations due to a number of factors, including but not limited to pests and disease, weather patterns, changes in demand by consumers, food safety advisories, the timing of the receipt, reduction, or cancellation of significant customer orders, the gain or loss of significant customers, the availability, quality and price of raw materials, the utilization of capacity at our various locations and general economic conditions. Our financial reporting currency is theU.S. dollar. The functional currency of substantially all of our subsidiaries is theU.S. dollar and substantially all of our sales are denominated inU.S. dollars. A significant portion of our purchases of avocados are denominated in the Mexican Peso and a significant portion of our growing and harvesting costs are denominated in Peruvian Soles. Fluctuations in the exchange rates between theU.S. dollar and these local currencies usually do not have a significant impact on our gross margin because the impact affects our pricing by comparable amounts. Our margin exposure to exchange rate fluctuations is short-term in nature, as our sales price commitments are generally limited to less than one month and orders can primarily be serviced with procured inventory. Over longer periods of time, we believe that the impact exchange rate fluctuations will have on our cost of goods sold will largely be passed on to our customers in the form of higher or lower prices. 20
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Three Months Ended
January 31,
2023 2022
(In millions, except for percentages) Dollars % Dollars %
Net sales $ 213.5 100 % $ 216.6 100 %
Cost of sales 204.5 96 % 216.1 100 %
Gross profit 9.0 4 % 0.5 - %
Selling, general and administrative expenses 19.1 9 % 18.7 9 %
Operating loss (10.1) (5) % (18.2) (8) %
Interest expense (2.4) (1) % (0.9) - %
Equity method income 1.0 - % 1.6 1 %
Other (expense) income, net (0.8) - % 1.6 1 %
Loss before income taxes (12.3) (6) % (15.9) (7) %
Income tax benefit (1.7) (1) % (2.5) (1) %
Net loss (10.6) (5) % (13.4) (6) % Net loss attributable to noncontrolling interest
(1.8) (1) % - - %
Net loss attributable to Mission Produce $ (8.8) (4) % $ (13.4) (6) %
Net sales
Our net sales are generated predominantly from the shipment of fresh avocados to
retail, wholesale and foodservice customers worldwide. Our net sales are
affected by numerous factors, including the balance between the supply of and
demand for our produce and competition from other fresh produce companies. Our
net sales are also dependent on our ability to supply a consistent volume and
quality of fresh produce to the markets we serve.
Three Months Ended
January 31,
(In millions) 2023 2022
Net sales:
Marketing and Distribution $ 181.8 $ 212.3
International Farming 1.9 4.3
Blueberries 29.8 -
Total net sales $ 213.5 $ 216.6
Net sales decreased $3.1 million or 1% in the three months ended January 31,
2023 compared to the same period last year. Lower sales in our Marketing and
Distribution segment were largely offset by the consolidation of revenue from
our Blueberries segment. In Marketing and Distribution, a 27% decrease in
average per-unit avocado sales prices was partially offset by an increase in
avocado volume sold of 14%, both of which were driven by higher industry supply
out of Mexico during the quarter.
Gross profit
Cost of sales is composed primarily of avocado procurement costs from independent growers and packers, logistics costs, packaging costs, labor, costs associated with cultivation (the cost of growing crops), harvesting and depreciation. Avocado procurement costs from third-party suppliers can vary significantly between and within fiscal years and correlate closely with market prices for avocados. While we have long-standing relationships with our growers and packers, we predominantly purchase fruit on a daily basis at market rates. As such, the cost to procure products from independent growers can have a significant impact on our costs. Logistics costs include land and sea transportation and expenses related to port facilities and distribution centers. Land transportation costs consist primarily of third-party trucking services to support North American distribution, while sea transportation cost consists primarily of third-party shipping of refrigerated containers from supply markets in South andCentral America to demand markets inNorth America ,Europe andAsia . Variations in containerboard prices, which affect the 21
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cost of boxes and other packaging materials, and fuel prices can have an impact
on our product cost and our profit margins. Variations in the production yields,
and other input costs also affect our cost of sales.
In general, changes in our volume of products sold can have a disproportionate
effect on our gross profit. Within any particular year, a significant portion of
our cost of products are fixed. Accordingly, higher volumes produced on
company-owned farms directly reduce the average cost per pound of fruit grown on
company owned orchards, while lower volumes directly increase the average cost
per pound of fruit grown on company owned orchards. Likewise, higher volumes
processed through packing and distribution facilities directly reduce the
average overhead cost per unit of fruit handled, while lower volumes directly
increase the average overhead cost per unit of fruit handled.
Three Months Ended
January 31,
2023 2022
Gross profit (in millions)
Gross profit as a percentage of sales 4.2 % 0.2 %
Gross profit increased$8.5 million or 1700% in the three months endedJanuary 31, 2023 compared to the same period last year to$9.0 million , and gross profit percentage increased 400 basis points to 4.2% of revenue compared to the same period last year. Gross profit and gross profit percentage for the three months endedJanuary 31, 2022 were significantly affected by challenges with the implementation of our new ERP system in our Marketing and Distribution segment. In the three months endedJanuary 31, 2023 higher volumes had a favorable impact on fixed cost absorption while the lower pricing environment limited our ability to generate per-box margins on the buy-sell of avocados. We experienced negative gross margin within the Blueberries segment during the first quarter of 2023 as a result of weak sales prices within the European and US markets driven by strong industry supply as well as the amortization of purchase accounting adjustments associated with the business combination of Moruga during fiscal 2022.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses primarily include the costs associated with selling, professional fees, general corporate overhead and other related administrative functions.
Three Months Ended
January 31,
(In millions) 2023 2022
Selling, general and administrative expenses SG&A expenses increased$0.4 million or 2% in the three months endedJanuary 31, 2023 compared to the same period last year. The current period included the consolidation of$1.6 million in expenses from the Blueberries segment, a large portion of which was attributed to amortization of an intangible asset recognized in the business combination. This impact was partially offset by non-recurring ERP process reengineering costs incurred in the previous period.
Interest expense
Interest expense consists primarily of interest on borrowings under working capital facilities that we maintain and interest on other long-term debt used to make capital and equity investments.
Three Months Ended
January 31,
(In millions) 2023 2022
Interest expense $ 2.4 $ 0.9
Interest expense increased $1.5 million or 167% in the three months ended
January 31, 2023 compared to the same period last year. The increases were due
to rising interest rates, as the majority of our outstanding debt is subject to
variable rates. Additionally, we incurred interest expense of $0.3 million in
the first quarter of 2023 related to a long-term land lease for blueberry
development which was classified as a finance lease.
22-------------------------------------------------------------------------------- To reduce interest rate risk on our long-term debt, we have interest rate swaps with a total notional amount of$100 million to hedge changes in the variable rates applicable to our term loan principal. Gains or losses generated from the swaps are recognized in other expense (income) in the consolidated financial statements. Equity method income Our material equity method investees include Henry Avocado ("HAC"), Mr. Avocado, Copaltas, and up untilMay 1, 2022 , Moruga. OnMay 1, 2022 , Moruga became a variable interest entity and prospectively consolidated into our financial statements. Three Months Ended January 31, (In millions) 2023 2022 Equity method income$ 1.0 $ 1.6 Equity method income decreased$0.6 million or 38% in the three months endedJanuary 31, 2023 compared to the same period last year, primarily due to the consolidation of Moruga. Other expense (income), net Other expense (income), net consists of interest income, currency exchange gains or losses, interest rate derivative gains or losses and other miscellaneous income and expense items. Three Months Ended January 31, (In millions) 2023 2022 Other expense (income), net$ 0.8
Other expense was$0.8 million in three months endedJanuary 31, 2023 compared to other income of$1.6 million in the same period last year primarily due to loss on foreign currency transactions in the current period compared to gains in the prior period, both driven by movement between theU.S. dollar and Mexican peso. Our interest rate swaps also generated gains in the previous period as a result of rising interest rates during the period.
Income taxes
The benefit or provision for income taxes consists of the consolidation of tax
provisions, computed on a separate entity basis, in each country in which we
have operations. We recognize the effects of tax legislation in the period in
which the law is enacted. Our deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years we
estimate the related temporary differences to reverse. Realization of deferred
tax assets is dependent upon future earnings, the timing and amount of which are
uncertain.
We recognize a tax benefit from an uncertain tax position only if it is more
likely than not the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized from such positions are then measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon settlement.
Interest and penalties related to unrecognized tax benefits are recognized
within provision for income taxes.
Three Months Ended
January 31,
2023 2022
Income tax benefit (in millions) $ 1.7 $ 2.5
Effective tax rate 13.8 % 15.7 %
The income tax benefit decreased
23-------------------------------------------------------------------------------- foreign jurisdictions which is taxed at different rates from theU.S. federal statutory tax rate of 21%, changes in foreign exchange rates taxable in foreign jurisdictions and nondeductible tax items.
Segment Results of Operations
Our CEO evaluates and monitors segment performance primarily through segment
sales and segment adjusted earnings before interest expense, income taxes and
depreciation and amortization ("adjusted EBITDA"). We believe that adjusted
EBITDA by segment provides useful information for analyzing the underlying
business results as well as allowing investors a means to evaluate the financial
results of each reportable segment in relation to the Company as a whole. These
measures are not in accordance with, nor are they a substitute for or superior
to, the comparable GAAP financial measures.
Adjusted EBITDA refers to net income (loss), before interest expense, income
taxes, depreciation and amortization expense, stock-based compensation expense,
other income (expense), and income (loss) from equity method investees, further
adjusted by asset impairment and disposals, net of insurance recoveries, farming
costs for nonproductive orchards (which represents land lease costs), certain
noncash and nonrecurring ERP costs, transaction costs, amortization of inventory
adjustments recognized from business combinations, and any special,
non-recurring, or one-time items such as remeasurements or impairments, and any
portion of these items attributable to the noncontrolling interest, all of which
are excluded from the results the CEO reviews uses to assess segment performance
and results.
Net sales
Marketing and International Marketing and International
Distribution Farming Blueberries Total Distribution Farming Total
Three Months Ended
January 31,
(In millions) 2023 2022
Third party sales $ 181.8 $ 1.9 $ 29.8 $ 213.5 $ 212.3 $ 4.3 $ 216.6
Affiliated sales - 3.8 - 3.8 - (1.0) (1.0)
Total segment sales 181.8 5.7 29.8 217.3 212.3 3.3 215.6
Intercompany eliminations - (3.8) - (3.8) - 1.0 1.0
Total net sales $ 181.8 $ 1.9 $ 29.8 $ 213.5 $ 212.3 $ 4.3 $ 216.6
Adjusted EBITDA
Three Months Ended
January 31,
(In millions) 2023 2022
Marketing and Distribution adjusted EBITDA $ 4.6 $ (7.7)
International Farming adjusted EBITDA (1.8) (2.7)
Blueberries adjusted EBITDA (0.5) -
Total reportable segment adjusted EBITDA $ 2.3 $ (10.4)
Net loss (10.6) (13.4)
Interest expense 2.4 0.9
Income tax benefit (1.7) (2.5)
Depreciation and amortization(1) 9.3 4.5
Equity method income (1.0) (1.6)
Stock-based compensation 0.7 0.8
Asset impairment and disposals, net of insurance 0.3 0.1
recoveries
Farming costs for nonproductive orchards 0.4 0.5
ERP costs(2) 0.6 1.5
Transaction costs 0.1 0.4
Amortization of inventory adjustment recognized from 0.7 -
business combination
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Other expense (income) 0.8 (1.6)
Noncontrolling interest(3) 0.3 -
Total adjusted EBITDA $ 2.3 $ (10.4) (1)Includes depreciation and amortization of purchase accounting assets of
(2)Includes recognition of deferred implementation costs for both periods, and for the three months endedJanuary 31, 2022 , non-recurring post-implementation process reengineering costs are also included. (3)Represents net loss attributable to noncontrolling interest plus the impact of non-GAAP adjustments, allocable to the noncontrolling owner based on their percentage of ownership interest.
Marketing and Distribution
Net sales in our Marketing and Distribution segment decreased$30.5 million or 14% in the three months endedJanuary 31, 2023 compared to the same period last year, primarily due to a 27% decrease in average per-unit avocado sales prices, partially offset by an increase in avocado volume sold of 14%, both of which were driven by higher industry supply out ofMexico during the quarter.
Segment adjusted EBITDA increased
International Farming
Substantially all sales of fruit from our International Farming segment are to the Marketing and Distribution segment, with the remainder of revenue largely derived from services provided to third parties and our Blueberries segment. Affiliated sales are concentrated in the second half of the fiscal year in alignment with the Peruvian avocado harvest season, which typically runs from April through August of each year. As a result, adjusted EBITDA for the International Farming segment is generally concentrated in the third and fourth quarters of the fiscal year in alignment with the timing of sales. The Company operates approximately 700 acres of mangos inPeru that are largely in an early stage of production. The timing of the mango harvest is concentrated in the fiscal second quarter and, as a result, mangos have a more pronounced impact on segment financial performance during this timeframe. Total segment sales in our International Farming segment increased$2.4 million , or 73% in the three months endedJanuary 31, 2023 compared to the same period last year due primarily to higher packing and cooling service revenue for our blueberry operations. Net sales decreased due to the consolidation of the Blueberries segment in the current period, thus eliminating sales generated from Moruga.
Segment adjusted EBITDA increased
Blueberries
Sales in our Blueberries segment are concentrated in the first and fourth quarters of our fiscal year in alignment with the Peruvian blueberry harvest season, which typically runs from July through January.
Net sales in our Blueberries segment were$29.8 million and segment adjusted EBITDA was$(0.5) million for the three months endedJanuary 31, 2023 . Negative segment adjusted EBITDA was a result of weak blueberry sales prices within the European andU.S. markets driven by strong industry supply.
Liquidity and Capital Resources
Operating activities
Operating cash flows are seasonal in nature. We typically see increases in working capital during the first half of our fiscal year as our supply is predominantly sourced fromMexico under payment terms that are shorter than terms established for other source markets. In addition, we are building our growing crops inventory in our International Farming segment during the first half of the year for ultimate harvest and sale that will occur during the second half of the fiscal year. While these 25
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increases in working capital can cause operating cash flows to be unfavorable in
individual quarters, it is not indicative of operating cash performance that we
expect to realize for the full year.
Three Months Ended
January 31,
(In millions) 2023 2022
Net loss $ (10.6) $ (13.4)
Depreciation and amortization 9.3 4.5
Equity method income (1.0) (1.6)
Noncash lease expense 1.4 1.2
Stock-based compensation 0.7 0.8
Dividends received from equity method investees 2.7 2.2
Deferred income taxes (0.5) -
Other 0.5 (0.6)
Changes in working capital (3.8) (34.5)
Net cash used in operating activities $ (1.3) $ (41.4)
Net cash used in operating activities was$1.3 million for the three months endedJanuary 31, 2023 , compared to$41.4 million for the same period last year. The change was driven by a reduction in our net loss despite higher depreciation and amortization expense and favorable net changes in working capital. The increase in depreciation and amortization was largely attributed to the consolidation of the Blueberries segment in the current period, inclusive of the impact of the amortization of purchase accounting adjustments. Within working capital, favorable changes in accounts receivable and inventory were partially offset by unfavorable changes in accounts payable and grower payables. Changes in inventory and grower payables were driven by lower per-unit cost of Mexican sourced fruit on-hand in comparison to prior period. Favorable changes in accounts receivable were attributed to lower per-unit sales prices, which correlate to the costing factors noted above. Investing activities Three Months Ended January 31, (In millions) 2023 2022
Purchases of property, plant and equipment
(0.3) -
Loan repayments from equity method investees - 1.0
Other - (0.2)
Net cash used in investing activities
Capital expenditures In the three months endedJanuary 31, 2023 and 2022, capital expenditures were concentrated in avocado orchard development, pre-production orchard maintenance and land improvements inPeru andGuatemala . In the first quarter of 2023, capital expenditures also included construction costs on our newUK distribution facility that is scheduled to open in spring 2023 and$4.4 million of spend related to irrigation installation and early-stage plant cultivation in our Blueberries operation.
Equity method investees
In the three months endedJanuary 31, 2023 , we made capital contributions to Mr. Avocado. In the three months endedJanuary 31, 2022 , we received an installment payment on outstanding loans to Moruga. From time to time, we may issue loans to support the working capital needs of our equity method investees, at market interest rates. 26
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Financing activities
Three Months Ended
January 31,
(In millions) 2023 2022
Borrowings on revolving credit facility $ 10.0 $ -
Short-term borrowings, net (2.5) -
Principal payments on long-term debt obligations (0.9) (2.2)
Principal payments on finance lease obligations (1.7) (0.3)
Taxes paid related to shares withheld from the settlement of equity awards
(0.4) -
Contributions from noncontrolling interest holders 1.0 -
Net cash provided by (used in) financing activities $ 5.5 $ (2.5) Borrowings and repayments of debt
We utilize a revolving line of credit for short-term working capital purposes. Principal payments on our term loans and other notes payable are made in accordance with debt maturity schedules.
Other
Principal payments on finance lease obligations during the first quarter of 2023 primarily related to a long-term land lease by our Blueberries segment, which for accounting purposes has been classified as a finance lease.
Contributions from noncontrolling interest holders were made in support of the
blueberry capital project in the Olmos region of
Capital resources (In millions) January 31, 2023 October 31, 2022 Cash and cash equivalents $ 39.2 $ 52.8 Working capital(1) 120.1 126.4
(1)Includes cash and cash equivalents
Capital resources include cash flows from operations, cash and cash equivalents, and debt financing. Our Blueberries segment may also receive capital contributions or loans from shareholders, or enter into short-term bank borrowings from time to time.
Our syndicated credit facility with Bank of America has a total borrowing capacity of$250 million . The credit facility is comprised of two senior term loans totaling$100 million and a revolving credit agreement up to$150 million . The loans are secured by assets of the Company, including certain real property, personal property and capital stock of the Company's subsidiaries. Borrowings under the credit facility bear interest at a spread over SOFR ranging from 1.5% to 2.5% depending on the Company's consolidated total net leverage ratio. We pay fees on unused commitments on the credit facility. As ofJanuary 31, 2023 , we were required to comply with the following financial covenants: (a) a quarterly consolidated leverage ratio of not more than 3.5 to 1.00 and (b) a quarterly consolidated fixed charge coverage ratio of not less than 1.25 to 1.00. As ofJanuary 31, 2023 , our consolidated leverage ratio was 2.11 to 1.00 and our consolidated fixed charge coverage ratio was 2.29 to 1.00 and we were in compliance with all such covenants of the credit facility.
Material cash requirements
Capital expenditures
We have various capital projects in progress for farming expansion and facility
improvements which we intend to fund through our operating cash flow as well as
cash and cash equivalents on hand. For fiscal 2023, we expect capital
expenditures
27-------------------------------------------------------------------------------- excluding theMoruga Blueberry Project (described below) to be lower than fiscal 2022. Cash paid for capital expenditures for the year endedOctober 31, 2022 was$61.2 million .Moruga Blueberry Project OnMay 1, 2022 , the shareholders of Moruga approved a new capital project to farm approximately 1,500 additional acres of blueberries in the Olmos region ofPeru . The project is anticipated to require a total investment of approximately$50 million , the majority of which will be funded by cash flow generated by Moruga and supplemented by pro-rata shareholder contributions based on each shareholders' respective ownership interest. The project is expected to be carried out in phases, commencing in fiscal year 2023. For fiscal 2023, capital expenditures related to the project are currently expected to be approximately$15.0 million , depending on timing and other factors.
Leases
We are party to various leases for facilities, land, and equipment, for which our undiscounted cash liabilities were$183.8 million as ofJanuary 31, 2023 . Of that amount, approximately$60.0 million was related to the commencement of a portion of a 25-year land lease agreement in our Blueberries segment.
Long-term Debt
As ofJanuary 31, 2023 , remaining maturities on our term loans and notes were$150.1 million . See Note 5 to the consolidated financial statements for more information.
Critical accounting estimates
For a discussion of our critical accounting estimates, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Operations" in our Annual Report on Form 10-K for the year endedOctober 31, 2022 , filed with theSEC onDecember 22, 2022 . There have been no material changes to the critical accounting estimates disclosed in such Annual Report on Form 10-K.
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